Large potential for agroforestry as a mitigation option has given rise to scientific and policy questions. This paper addresses methodological issues in estimating carbon sequestration potential, baseline determination, additionality and leakage in Khammam district, Andhra Pradesh, southern part of India. Technical potential for afforestation was determined considering the various land use options. For estimating the technical potential, culturable wastelands, fallow and marginal croplands were considered for Eucalyptus clonal plantations. Field studies for aboveground and below ground biomass, woody litter and soil organic carbon for baseline and project scenario were conducted to estimate the carbon sequestration potential. The baseline carbon stock was estimated to be 45.33 tC/ha. The additional carbon sequestration potential under the project scenario for 30 years is estimated to be 12.82 tC/ha/year inclusive of harvest regimes and carbon emissions due to biomass burning and fertilizer application. The project scenario though has a higher benefit cost ratio compared to baseline scenario, initial investment cost is high. Investment barrier exists for adopting agroforestry in the district.